In our March issue we discussed incorporation basics and entity selection. We focused on limited liability companies and corporations, as they are the most common entities used. We thought it might be helpful to follow up on that article with a brief discussion on professional limited liability companies and professional corporations.

PROFESSIONAL LIABILITY COMPANY

A professional limited liability company (“P.L.L.C.”) is organized for the sole purpose of providing professional services by licensed professionals. Generally, states don’t allow L.L.C.’s for businesses where a license is required. Licensed professionals who want the benefits of an L.L.C. must form a P.L.L.C. instead. A P.L.L.C. must be organized solely for the purpose of engaging in either a single licensed profession, or in two or more that can be lawfully practiced together. The name of the business must include the words “professional limited liability company,” or the abbreviation “P.L.L.C.” Generally, any person who is licensed to practice in a state under a designated profession may organize a P.L.L.C. A professional is a person licensed in a field such as health, law, engineering, architecture, accounting, actuarial science, or another similar field. However, licensing requirements may vary state by state. Therefore, one must thoroughly review the applicable statute for the state in which the P.L.L.C. will conduct business.

A professional or group of professionals considering incorporation would consider a P.L.L.C. for the favorable pass-through tax treatment and limited liability – a member of a P.L.L.C. is not liable for acts of another member or the entity’s debts. Note, however, that members remain personally liable for their own professional misconduct or malpractice. So, even if you practice a profession through a P.L.L.C., it is a good idea to carry malpractice insurance.

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A foreign entity or individual planning on making an acquisition or conducting some other form of commercial activity in the United States must consider what type of U.S. entity to use in that endeavor. We thought it might be helpful to set out the options and answer an even more basic question for those considering activity in the United States: Why should you incorporate?

There are many advantages to conducting business through a properly formed business entity:

Asset Protection. C corporations and limited liability companies generally allow owners to separate and protect their personal assets in the event of a lawsuit or claims against the business entity.
Name Protection. Most states will not allow another business to form an entity with the same name as an already existing entity. Once you have filed an organizational document with a State’s Secretary of State another entity cannot be formed with the same name.
Credibility. In many instances, consumers, vendors and partners may prefer to do business with an incorporated entity.
Tax Flexibility. Assuming you have no plans to go public, you generally will be able to choose whether your entity will be subject to a corporation income tax or whether profits and losses will be “passed through” to the shareholder, partner, or member.